Arizona Life and Health Practice Exam

What is the tax treatment of benefit payments for a non-qualified annuity?

1. They are partially taxable depending on age

2. Benefit payments are always fully taxable

3. Payments are tax-free until a certain limit

4. Only the interest portion is taxable

The correct answer is: Benefit payments are always fully taxable

For non-qualified annuities, the tax treatment of benefit payments is that only the interest earned on the investment is taxable as income. When you receive payments from a non-qualified annuity, you have already paid taxes on the principal amount used to purchase the annuity, so that portion of your withdrawal or payment is not taxed again. Therefore, as you receive payments, you are taxed only on the earnings or interest accumulated within the annuity. The classification of these payments as fully taxable does not hold true because of the nature of non-qualified annuities and how they treat the principal and interest. Understanding how these payments are structured is crucial for tax planning and financial advice, as it helps clarify the difference between how qualified and non-qualified annuities are taxed. It is important to pay careful attention to these distinctions, as they can significantly impact an individual's tax liability when receiving benefits from an annuity.